Technology can make global trade more inclusive, but policies must change to realize this potential.

The latest chapter in the IRPP’s trade volume describes the emerging phenomenon of technology-enabled (‘online’) trade. In this chapter, authors Usman Ahmed and Hanne Melin (eBay Inc.) analyze a unique dataset of Canadian firms using eBay in 2008-13. The experiences of these businesses demonstrate that technology-enabled trade is broader and more inclusive than traditional trade. These firms are much more likely to export, they reach more countries, and in these markets, there are more new entrants (particularly smaller firms), and sales are less concentrated among the top firms. Existing policies, however, are creating obstacles to these cross-border transactions, such as the low threshold for exemption from customs duties, and customs risk assessment procedures that are ill-suited to small traders.

So, how does technology-enabled trade differ from traditional trade?

Traditional trade is dominated by large multinational companies. They make big, regular shipments of a standard range of products using commercial trucks, ships and cargo containers along well-established trade corridors.

Technology-enabled trade, on the other hand, features more small businesses and newcomers. They ship smaller-valued, niche or customized products using the postal system on an irregular basis to idiosyncratic locations. Consumers often find these firms, rather than the other way around.

Better information flows, enhanced connectivity and growing trust in online transactions have helped spur this new type of trade. The Internet has obviously been a key driving force. Online marketplaces and search engines allow businesses of all sizes to connect and trade directly with one another and with consumers around the world. Customer satisfaction ratings and reliable payment systems engender trust between traders. And efficient global logistics providers can deliver products directly to consumers, quickly and cheaply, while also helping them track their purchases digitally. These developments have rapidly lowered the costs of communicating, searching for and reaching new markets and, as a result, are effectively shrinking the impact of distance on trade.

Here are some key findings from this chapter:

Finding 1: Technology-enabled firms are much more likely to export than traditional ‘offline’ traders.

Virtually all of the Canadian firms with annual sales of at least $10,000 on eBay were selling outside the country. By contrast, overall only about 10 percent of Canadian small businesses exported; the share is even lower for US firms.

Among Canadian eBay firms, export growth was particularly pronounced to emerging markets in the Asia-Pacific, South America and Africa — a welcome development as diversifying Canada’s export mix is a government objective.

Even when traditional small businesses in Canada are able to reach beyond the US market, they serve only one or two more countries on average. In contrast, Canadian exporters on eBay reached an average of 19 different markets.

Digging deeper into the numbers, even the smallest 10 percent of eBay traders reached an average of 11 markets, while the largest 10 percent sold to 38 markets on average (and one Canadian business sold to 133 different countries!)

Finding 3: Technology-enabled markets have more entrants and less concentrated outcomes.

International trade is generally dominated by a small number of very large, well-established firms. For instance, in 2014 among traditional traders, the top 10 Canadian exporters by value accounted for one-quarter of country’s goods exports (yet they made up only 0.02 percent of the over 41,200 exporters). Alternatively, technology-enabled trade has more newcomers and they capture more market share. By way of comparison, the largest 3.3 percent of exporters by value captured 82 percent of the market for traditional traders versus only 36 percent for eBay sellers in Canada.

Policy recommendations

Technology-enabled small businesses face unique challenges that must be better integrated into trade discussions in order to realize the full potential of these new trends. This chapter makes a broad set of policy recommendations, but here I’ll describe just three:

Recommendation 1: Raise Canada’s import exemption threshold

Antiquated customs regimes represent a big obstacle to this emerging trade. International transactions can be subject to import duties, but countries waive these taxes on shipments below a certain value, called the low-value threshold (the LVT, or “de minimis” customs level). With the United States recently raising its threshold to $800 US, Canada’s choice of only $20 CAD is increasingly out of step and should be increased. Indeed, a recent C.D. Howe paper estimates that raising Canada’s LVT would benefit our consumers and businesses (particularly smaller firms) and would have a limited impact on government revenues.

Recommendation 2: Update customs risk assessments

Technology-enabled trade is often undertaken by small firms with little exporting experience, irregularly dispatching smaller shipments to several destinations. Customs risk assessments (which are used to determine which goods require additional screening at border crossings) should be updated to reflect these new trading realities and not necessarily presume that such activity is higher risk. Valuable information not readily available for traditional trade could help inform our customs procedures — such as the feedback scores and ratings generated by these online transactions.

“Trusted trader” programs allow the private sector to share in the security responsibilities of customs, in exchange for trade facilitation benefits, such as faster processing of their goods by customs officials due to a lower rate of physical inspections.

The benefits of trusted trader programs are strongest when countries conclude mutual recognition agreements — where being a trusted trader in one country allows a firm to be recognized by other parties to the agreement, with mutually recognized and reciprocal benefits. Canada could take the lead in pushing for a global system of mutual recognition, working with the OECD, the World Customs Organization and the World Trade Organization.

The potential of technology to democratize trade

More inclusive global trade that features more small traders has the potential to deliver economic, social and political benefits. From an economic perspective, we know that exporting can improve a firm’s performance. From a social perspective, smaller businesses that traditionally have not reaped the full benefits of globalization might be brought into the global system, creating a more inclusive marketplace. Consumers around the world also stand to gain through lower prices and increased selection. Lastly, from a political perspective, some voices argue that international trade can harm local businesses, while only benefiting a small number of firms and elites. Encouraging the rise of “micro-multinationals” might help counter some of this criticism and build broader support for trade-enhancing policies.

I encourage you to read the full chapter here. It argues that with some policy changes and more focus on these emerging trade issues, there’s significant potential for small business traders to leverage technology and expand their global reach.

Photo: mervas/Shutterstock.com

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Stephen Tapp is a Research Director at the IRPP, where he's currently managing a multi-year research initiative titled Redesigning Canadian Trade Policies for New Global Realities. He previously worked at the Parliamentary Budget Office and the Bank of Canada, among other positions. Steve has a PhD in economics from Queen's University. Follow him on Twitter @stephen_tapp.

Stephen Tapp is a Research Director at the IRPP, where he's currently managing a multi-year research initiative titled Redesigning Canadian Trade Policies for New Global Realities. He previously worked at the Parliamentary Budget Office and the Bank of Canada, among other positions. Steve has a PhD in economics from Queen's University. Follow him on Twitter @stephen_tapp.